Solvency analysis is necessary for any enterprise, as with the help of its tools it is possible to characterize the financial situation of a business entity. In other words, this is an assessment of the possibility of timely repayment of your payment obligations with available financial resources.
Analysis of the balance sheet liquidity and solvency of the enterprise is carried out based on the characteristics of the liquidity of current assets, and is determined by the period of time that is needed to convert them into cash. It should be borne in mind that the value of the liquidity indicator depends on the time taken to withdraw this asset, i.e. the higher the liquidity, the less time is needed to collect this asset.
Solvency analysis shows the company's ability to turn assets into cash and pay off its own liabilities. In this case, the compliance of the maturity of obligations with the period of conversion of assets into money is taken into account. These indicators depend on the results of comparing the amount of means of payment available to the company and the amount of short-term liabilities.
The liquidity of a company is a more general concept in comparison with the liquidity of the balance sheet. The second indicator characterizes the ability of the enterprise to seek funds only from internal sources. For example, from the sale of assets. However, the company may also attract external borrowed funds with a favorable financial image in the business market and a sufficiently high level of attractiveness in the investment aspect.
The analysis of solvency and liquidity is similar by the methods of implementation, however, the second concept is more capacious. Indeed, if you look in more detail, solvency depends on liquidity. Moreover, with the help of liquidity, a characteristic is given both of the current state of settlements and for the future. A company may be deemed solvent at a specific date, and at the same time, adverse results are expected in the near future.
In the literature there is the concept of “liquidity of current assets”, with which solvency analysis is carried out. And another term - “liquidity of total assets” is used to assess the possibility of their early sale in the event of bankruptcy.
All three terms in question are closely interconnected with each other. Thus, balance sheet liquidity is the “foundation” of a company's liquidity and solvency. In other words, liquidity is the main way to regulate solvency. Moreover, with a sufficiently high image, the enterprise constantly maintains a high level of solvency, which makes it much easier to keep liquidity at the proper level.
Analysis of solvency and financial stability is a mandatory part of the analysis of the financial activities of the entity. The concept of “financial stability” itself shows the balance of all financial flows, the availability of the necessary funds to support its activities by the enterprise in a certain period of time in the process of carrying out its main business activities, repaying financial loans, etc.
In other words, financial stability is a predictive indicator of solvency over a long period of time.
Solvency must be distinguished from such an indicator as creditworthiness. The second term is used to conduct internal financial analysis by special structural units of the company.